The Lowdown: Rebooted | 3rd September 2018

September 3rd, 2018

The Lowdown: Rebooted Following our successful management buy-out, we are delighted to relaunch The Lowdown, Peter Lowman’s (CIO) weekly reflections and analysis of the global financial markets delivered straight to your inbox. Highlights: A trade deal between the United States and Mexico creates a little more optimism across the markets. Trump’s proposal to back […]

The Lowdown: Rebooted

Following our successful management buy-out, we are delighted to relaunch The Lowdown, Peter Lowman’s (CIO) weekly reflections and analysis of the global financial markets delivered straight to your inbox.

Highlights:

A trade deal between the United States and Mexico creates a little more optimism across the markets.

Trump’s proposal to back tariffs on US$200 billion in Chinese imports generates further uncertainty.

The emerging markets continue to suffer as the Argentinian Peso and Turkish lira come under greater pressure.

Sentiment in relation to Brexit appears to have improved as the EU offers an “unprecedented partnership” with the UK.

Sterling strengthens on suggestions of a soft Brexit, while the FTSE 100 Index dips on concerns over future earnings.

Market Summary

The global equity markets behaved somewhat erratically during the rest of August. The US stock market recorded its best August performance in over four years, while the emerging markets suffered from further contagion caused by the political and economic conditions in Argentina and Turkey – both the peso and the lira fell dramatically over the month.

The S&P 500 and NASDAQ Composite Indices were propelled to new all-time highs by confidence in technology stocks, particularly those of Amazon – which for the first time saw its stock price surpass US$2000, and of Apple – whose stock price has risen on speculation about the launch of its new iPhone.

However, positive sentiment earlier in the week was then quashed by suggestions that President Trump and his administration were planning to impose a further US$200 billion of tariffs on Chinese imports. He also threatened to withdraw the US from the World Trade Organisation and rejected the recent EU proposal to scrap car tariffs. The news that the US and Mexico had reached a satisfactory trade deal did, however, help subdue some of the anxieties over the trade war tensions.

Meanwhile, negative sentiment in relation to the emerging markets in recent weeks was not helped by further crisis fears over Argentina and Turkey, with the former raising its interest rates by 15% to 60% in a bid to stabilise its currency. Elsewhere, concerns over credit rating agency Fitch cutting Italy’s credit outlook damaged its bond market. As a result, many global bond investors favoured the quality end of the government bond markets, rather than the riskier end, which in turn, saw most of the support for German Bunds.

Data released last week now suggests that eurozone growth is much stronger than was perhaps was initially thought, with seemingly subdued inflationary pressures. This might justify a more positive outlook for the eurozone region.

Brexit negotiations are still very much at the forefront of investors’ minds, both in the UK and in Europe. Last week’s comments from Michel Barnier, the European Union’s chief Brexit negotiator, suggested that Europe might be prepared to offer an unparalleled partnership with the UK, something which surprised a number of market watchers.

This announcement was subsequently interpreted by many as an indication that the UK might be heading for a soft Brexit, propelling sterling to its highest level since early August. If indeed the UK were to end up with a soft Brexit, sterling could easily rally by a further 10%.

Understandably, last week’s spike in the pound led to some pessimism in relation to the FTSE 100 Index, given its heavy weighting towards international businesses with overseas earnings.

As far as corporate activity is concerned, we saw Costa Coffee owner Whitbread agree to sell Britain’s biggest coffee chain to Coca-Cola, pushing Whitbread’s share price up by more than 40% as a result. This comes amid deep concern about British shopping centres – concern that has been detailed in a recently-published financial report.

Disruptive technologies are clearly having an impact across many global sectors, but perhaps more so in areas like retail, where companies such as Amazon and Alibaba are entering the market with their high-end technology services.

Finally, as we move into autumn, investors will begin focusing their thoughts on the final quarter of the year – in the knowledge that historically, September has been known to be a rather destructive month for returns. In fact, in local currency terms, the MSCI World Index (excluding the US) is already in negative territory for the year. This is disappointing, given that fundamentals remain relatively positive, something which could conceivably help the markets over the rest of the year.

Peter Lowman, Chief Investment Officer at Investment Quorum, a Director of the company and an integral member of our investment committee.

This article does not constitute specific advice and investors should bear in mind capital invested is not guaranteed. Investment Quorum is authorised and regulated by the Financial Conduct Authority.

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